On February 22, 2011, the Internal Revenue Service issued Revenue Ruling 2011-7 providing guidance regarding the mechanics of terminating non-ERISA section 403(b) plans. The Revenue Ruling provides guidance by presenting four sets of circumstances, each of which would constitute a termination of the applicable 403(b) plan.
At the time the final section 403(b) regulations were issued, the regulations included authority to terminate a 403(b) plan, but offered little guidance on how to do it. Unlike 401(k) plans, Section 403(b) plans frequently feature several record keepers and individual investment and annuity contracts. It was unclear what actions would constitute termination, especially when a plan sponsor may not have sufficient control to effect a distribution of custodial accounts or a participant has invested in an individual annuity contract. Under the final regulations, a 403(b) plan will be considered terminated if:
- the written plan includes authorization to terminate the plan;
- the employer (and all employers in the same control group) does not make a contribution to any 403(b) plan for a period of 12 months following the termination and distribution of all assets under the plan; and
- the plan distributes all accumulated benefits under the plan as soon as administratively practicable after termination.
For purposes of the third requirement above, Revenue Ruling 2011-7 defines a distribution to include the delivery of a fully paid individual insurance annuity contract or an individual certificate evidencing fully paid benefits under an insured group annuity contract, or a lump payment of a custodial account interest. This means that although plan benefits will continue to be subject to the annuity contract for purposes of termination, the plan sponsor may treat plans as terminated if annuity contracts have been delivered to participants.
Comment: Revenue Ruling 2011-7 sets forth the Internal Revenue Service's view of Section 403(b)(10) of the Internal Revenue Code. It does not address the Department of Labor's views as what actions are necessary to terminate an ERISA-covered plan.